Pakistan-India Trade:

Ijaz Nabi
complementarities continued to assert themselves, and India remained
Pakistan’s most important trading partner. It is important to note that
trade continued even during the first India-Pakistan war over Kashmir
in 1948. In 1949, half of Pakistan’s exports were sent to India (especially
agricultural produce and minerals), and 32 percent of its imports
(mainly manufactured goods) were from India.
In recognition of these geography- and history-anchored trade/economic
complementarities, GATT (Generalized Agreement on Tariffs
and Trade, the precursor of WTO), of which both Pakistan and India
were founding members, inserted an India-Pakistan specific clause in
the 38 Articles governing international trade (Article XXIV, clause 11):
Taking into account the exceptional circumstances arising out
of the establishment of India and Pakistan as independent states
and recognizing the fact that they have long constituted an economic
unit, the contracting parties agree that the provisions of
this Agreement shall not prevent the two countries from entering
into special arrangements with respect to the trade between
them, pending the establishment of their mutual trade relations
on a definitive basis.
It would be easy to conclude that the clause allows Pakistan and
India to continue to enjoy a close bilateral trading relationship not extended
to other GATT members, because they were an economic union
until 1947. This interpretation would be consistent with the overall trade
liberalization spirit of the GATT framework.
The fact, however, is that disagreements between the two countries
were laying the basis for a completely different interpretation of the clause.
Difficulties in the Pakistan-India trade relationship surfaced in 1949.
In anticipation of a commodity price boom, Pakistan (an exporter of
cotton, jute, and wheat) did not match India’s decision to devalue its currency.
India objected to this strongly, arguing that this would increase
the cost of raw materials (primarily jute) imported from Pakistan, and
imposed an import duty on jute. A deadlock ensued, disrupting, for the
first time, trade between the two countries.
In his budget speech to the parliament in Karachi on March 13,
1950, Pakistan’s Finance Minister, Ghulam Mohammad, said:
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